Trade Flashcards
absolute advantage
when a country can make a product using less factors of production than another country
comparative advantage
is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners
assumptions in comparative advantage
- all product are homogenous
- there are no trade barriers
- perfect knowledge and all consumers know where to buy the cheapest product
dynamic gains from trade
- Economies of scale
- increased competitive pressure
- increased innovation may result in more choice
draw a tariff graph
nice
what point will trade be mutually beneficial
where the rate of exchange lies between the opportunity cost ratios between the two countries
dynamic gains from trade
- Economies of scale
- increased competitive pressure
- increased innovation may result in more choice
what determines whether a country has comparative advantage
quality and quantity of factors of production
EG ghana may be able to better produce cotton because the soil is more fertile
Eg India may have a more educated workforce and can make computers more efficiently
reasons to protect an industry
- infant industry
- strategic (keeping agriculture so other countries don’t have power over us)
- to avoid dumping
why do infant industries need protection
as they are developing the firms within may not be able to benefit from economies of scale and may not be able to compete with international firms as a result
it may also help diversify the economy making it less reliant on industries such as oil and oil prices
evaluation of protectionism
protectionist measures must be implemented in the short term otherwise inefficiencies will develop as domestic firms lack competition and consumer surplus will decline as prices may rise and variety may decline.
what is dumping
when a country imports a high quantity of goods at a prove which is below cost.
this means domestic firms can’t compete and may be priced out of the industry as a result
why may over reliance occur
If a country fails to protect its vital industries such as food or energy
why may tariff occur
Brexit leaving the trade bloc means the UK will no longer benefit from free trade
Why is protectionism bad?
/ Why is free trade good?
The implementation of tariffs makes goods such as Dutch medication much more expensive
Meaning those who need medicine are less able to finance other necessities resulting in food poverty
Resulting in the loss in welfare shown in sections 2 and 4 in the tariff diagram
Evaluation of why free trade is important
- it is particularly important for free trade as the government want corona virus vaccines for cheaper so more people can access them and the UK can benefit from herd immunity
examples of infant industries need protection
the UAE are massively reliant on oil. Increase in oil prices would result in massive inflation and the economy would be unstable as a result.
technology industries were protected so the economy was more diverse and less reliant on oil as a result
An example of a country who is over reliant on another
80% of Ukrainian gas comes from Russia giving Russia a massive political advantage.
If Russia were to have a strike urkain may be unable to power their homes
how to work out opportunity cost ratios
calculate how much it costs for product A in terms of product B
So if Country A could make 8 basket balls and only 6 shoes.
the opportunity cost of making one basket ball would be 6/8
opportunity cost ratios to remember
cost to make 1
Cars Trucks Germany 20 (0.75 trucks) 5 (1.3 cars)
UK 10 (0.5 Trucks) 15 (2 cars)
Arguments for free trade not aid
- Developing countries can access products at a lower cost without having to repay the debt of aid
- Foreign aid can displace local incentives to develop public services such as healthcare
Arguments for aid
- Just as some south East Asian countries have benefited from free trade it doesn’t mean that landlocked countries such in sub Saharan Africa will. High transport costs
- Benefits of free trade are not always equally distributed
What is free trade
An agreement between countries where there is no added costs to trade
What is aid
Money transferred to another country (usually following a disaster) in the form of a gift or a loan
Economic development
it means an improvement quality of life through measures such as life expectancy, literacy rates and healthcare.
how dependant are the US and Mexican economies on each other
40% of of the parts of a typical Mexican export comes from the US
A tariff would harm the US as they will export less.
A tariff would make Mexican products more expensive in both markets
Alternatives to trade protectionism
subsidies to provide capital to some industries may better allow domestic firms to compete globally as they can benefit from lower costs of production
Mercantilism
when a government seeks to promote domestic industries.
what percentage of land in France is used for Agriculture
55%
what percentage of land in UK is used for Agriculture
36%
what percentage of uk medicine is imported from the EU
90%
how can corruption impact development
- if the tax revenue earned it not reinvested back into the country through education
- bigger class sizes
- less one to one teaching
- worse grades and literacy rates
- resulting in less employability in the future
- less income/ less food
- less economic development
how can levels of savings impact development
without secure banking systems consumers are unable to build up their wealth
without wealth to invest there may not be any growth
The Harod domar model says that savings are vital for growth
how can tax levels impact development
with lower tax rates more businesses may be encouraged to set up in the country
this may provide more employment opportunities in the local economy
giving people increased income
what is a customs union
a trading bloc where members benefit from free trade but are protected by a common external tariff barrier
advantages of a custom union
- can get imported goods from the EU for cheaper
such as medicine
(90% of medicine in the UK Is imported from the EU
disadvantages of a custom union
- can’t give preferential tariffs to declining or infant industries.
for example the UK may be unable to compete in the EU industry
what is capital flight
occurs when assets of money rapidly leave a country.
why may capital flight occur
- increased interest rates
- rising income and corporation tax
- risk of governments becoming unable to repay debts
impact of capital flight
as a result of an increase in interest rates in the UK
- savers who are not inert may be encouraged to save with a US bank such a JP Morgan as they may be able to get a better return on their savings
- in doing so they have to buy dollars as pounds have little value in the US and sell their poundds
- this results in an increase in supply and a depreciation of the exchange rate
- this may make imports more expensive and cost push inflation may be caused
how and why have the UAE protected their economy.
- as the UAE was developing they became veery reliant on oil due to the huge reserves beneath the area and it contributed to a high percentage of their GDP as a result
- this was particularly damaging as when oil prices increased the country was subject to inflation making the country’s economy very unstable
- in order to prevent this tech firms were subsidised and tariffs were placed on competition abroad such as Apple
- they better benefitted from increased domestic demand as there were less substitutes and the incentive to increase production increased as a result
- then they can better benefit from economies of scale and better compete with global comp
- less reliant on oil as a result
how is HDI measured
- mean and expected years of schooling
- gdp per capita
- life expectancy
what ways can growth contribute to development
- higher demand= higher unemployment
- higher tax
however assumes there is no risk of dutch disease
what ways can growth harm development
- inflation
2. higher environmental damage
